Infrastructure Planning and
Management
Public Private Partnerships
Agenda
„
History of Privatization in Infrastructure
„
Types of Private Public Partnerships
(PPPs)
„
Advantages and Disadvantages of PPP
The infrastructure story
„
Who managed infrastructure in the 17th,
18th and 19th centuries?
… Private
players
… E.g. Railroads and power networks in the US
„
Why?
… Governments
did not have much money,
especially pre Industrial Revolution
The Suez Canal in 1860 was a
PPP
The history of the Canal
„
Circa 1854: The French consul in Caire, Ferdinand Marie
de Lesseps, creates the "Compagnie Universelle du
Canal Maritime de Suez"
„
25 Apr 1859: The French are officially allowed to begin
the canal construction (Said Pacha acquires 22% of the
Suez Canal Company, the rest of the shares are
controlled by French private holders)
„
16 Nov 1869: The Suez Canal opens; operated and
owned by Suez Canal Company
In the 20th century
„
Shift in infrastructure provision in the early part
… Communist
ideology, wars, depression, changing
social sentiments led to public sector being in charge
of infrastructure
„
Towards the 1970’s…
… Private
sector was again involved in infrastructure –
especially in the developing world
… Fall of Communism ushers rapid rise in private
participation
View 1: The Privatization-Nationalization Cycle
The Privatization and
Nationalization Cycle
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„
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The previous figure indicates that in many
countries the responsibility for infrastructure
provision has been cyclic in nature.
Private entrepreneurs have undertaken
infrastructure provision, but there has been a
decline in services and the state has then taken
over the provision of infrastructure
This public takeover has once again resulted in
inefficiencies that have then called far the retakeover of the private sector and so forth
View 2: The evolutionary model
The Entrepreneurial Model
The Rational Systems Model
The Governance Model
The Evolutionary Model
„
„
„
„
The evolutionary model is an alternate view of
the evolution of PPPs in infrastructure
In this view, a large amount of initial private
activity in infrastructure was in the form of wholly
owned private entrepreneurial enterprise (e.g.
railroads in the US)
This was then succeeded by a large scale
nationalization of infrastructure around the
world, based on rational, scale models
Starting from the 1970s there has been yet
another gradual change to Private-Public
Partnerships with mixed responsibilities and
adequate contractual governance, for the
provision of infrastructure
Private Public Partnerships
(PPP)
„
In the PPP mode, the private sector takes some,
but not necessarily all, of the risk and ownership
of an infrastructure project
„
The following slide shows some of the options
for PPPs
Privatization Options
Private Sector Control
Government Control
Govt.
Owned
Corporatized
EPC / O&M
Contracts
BOT
BOO
Full
Privatization
The Spectrum of PPP
„
„
„
„
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As indicated in the previous slide there is a spectrum of PPP options
The government can start by corporatizing a public sector entity so
that it acts as an autonomous corporation
The next stage is for the government to give out Operations and
Maintenance Contracts to the private sector on a performance
based contracting mode
Further down the spectrum is the popular BOT or Build-operatetransfer approach where the private sector entity (known as the
concessionaire) builds and operates infrastructure for a specified
period of time (known as a concession period) , and then transfers
the infrastructure back to the government. During this period the
private sector can recoup its investment either through user charges
or through payments made by the government
Finally, the government could turn over the ownership of the asset to
the private sector and allow the private sector to build, operate and
maintain the infrastructure
How to Privatize
First the government needs to decide whether the situation merits
privatization
1.
1.
Second the government should determine the kind of PPP
arrangement to be used
2.
1.
2.
One factor is the potential revenue that can be generated
Social issues and the voice of society can also be considered
The government can then ask private players to bid to own and
operate a project.
3.
1.
2.
4.
Are there public sector ills and private sector benefits that can be
identified?
The project should not be over-engineered - the private sector should
be allowed to bring its creativity to the table.
The private players should bid on a “bid variable” such as the amount
of tariff they will charge
The government can then monitor to ensure that the private
operator meets societal needs
Role of Private Players in BOT
1.
Procure financing
2.
Plan, Design, Construct the facility
3.
Operate and Maintain the facility
4.
Manage the infrastructure throughout the concession
period
5.
Ensure service to people
Role of the Government in BOT
„
To provide the climate for private infrastructure
players to work
„
To provide guarantees and commitments to
encourage the private sector to execute
infrastructure projects
„
To steer and not to row
… Since
the private sector absorbs financial and
performance risks in BOT projects, the government
should not control or decide actions. They should
merely enable the private sector to perform to the
best of their ability by clearing regulatory bottlenecks
and introducing incentives in favor of the project.
Government’s tasks
„
Planning
… Create
and monitor a Masterplan
… Land Acquisition, formation of shell companies
„
Competition
… Introduce
competition so that tariffs are low and
private monopolies do not come into existence
„
Prices
… Monitor
tariff levels in the interest of the public
Government’s tasks, Contd..
„
Contracts, Legal Frameworks
… Prepare
clear terms and specifications regarding
capital leases, concessions, assets
… Provide conflict resolution mechanisms, anticompetitive legislation
„
Regulation
… Provide
an Independent regulator to monitor
performance and to facilitate renegotiation of the
contract if any
„
Social Issues
… Increasing
Acceptability for the PPP project through
conducting stakeholder participation events
Why do we need to adopt PPPs?
What are the advantages?
„
„
„
„
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The Public sector often has some shortcomings
Finance - in some cases the public sector does not have
financial resources to build infrastructure
Projects are often heavily subsidized leading to an
increasing burden on the exchequer
There is sometimes a lack of expertise in the Public
sector when it comes to executing large and complex
projects
Public sector projects are sometimes characterized by
poor quality of work, frequent service disruptions, low
levels of motivation and incentives, corruption, leakage
and theft, selection bias, parochialism, vested interests
and power politics
Private sector’s advantages
„
Finance – can mobilize private funds or funds from
capital markets (larger source)
…
Reducing National debt and expenses
… Allows the public sector to channel more funds to healthcare,
education etc
… Increases state cash inflows due to taxes on the private
infrastructure!
„
The private sector is often motivated by profit. Since they
can be replaced, and thereby lose revenue, if they do not
provide good quality service, the private sector is likely to
be motivated to bring about improvements in efficiency
and quality of service
More advantages of the private
sector
„
The private sector has to potential to provide fair
(reduced) price of services
… Cannot
hike prices since they can be replaced and
will lose market share
… Prices can be higher than govt. controlled prices
„
Private sector efficiency can lead to high
customer satisfaction and higher volumes of
service, since reaching out to more people can
mean greater profitability
Still more advantages of the
Private Sector
„
Construction can be fast and of high quality
…
Fewer bureaucratic hurdles are present
… Innovative techniques are often adopted
„
„
„
Innovation in selecting, designing and developing
projects is likely
More resources – external manpower and experience
are often brought in
The following 3 slides present data on the increase in
quality of service due to private participation in
infrastructure in Latin America
Evidence of privatization in water
Evidence of privatization in energy
Fiscal Strength
Pitfalls with Private Participation
„
Despite these advantages, PPPs have experienced
turbulence in the past.
„
The following two slides graphically describe the recent
worldwide trends with respect to PPPs
…
„
As the graphs indicate the number of PPPs gradually increased
but have been falling in recent times.
A large number of PPP projects have been renegotiated
…
Although not many cancellations/expropriations
… This might have affected investor confidence
Privatization Trends
Privatization Trends
Problems faced by Private
provision of Infrastructure
„
Raise in Tariffs
…
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Unemployment
…
„
The private sector often operates with a reduced but more efficient
workforce, leading to a loss of jobs.
Unequal Access to the Poor
…
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Very often, in order for the project to be economically feasible, the
private sector is forced to raise user charges from preceding levels,
leading to unrest.
Since the poor are often not capable of paying for services, the private
sector may not see the value in including them in, say, water provision,
as a result the poor may be un-connected and might suffer.
Ideological issues
…
Citizens often perceive the responsibility of delivering infrastructure to
be with the government and therefore ideologically oppose privatization
of infrastructure.
More problems with privatization
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„
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Due to a lack of indigenous expertise, several foreign firms are often
called on to help build infrastructure in several developing countries.
This has lead to cultural problems, suspicions of wealth being
drained away to foreign organizations, and economic problems due
to currency fluctuations. These issues have often led to project
failure.
In some cases, political expropriation wherein a government agency
reneges on a contract and expropriates a privately built asset has
also led to a loss in confidence on the part of private investors. This
has also partly been due to the lack of a fair and independent
regulator in sectors that are opened up for privatization.
PPP contracts are often spread over 20-30 years and several
political, economic and social shocks arise over this period. Such
unforeseen events fundamentally alter the economics of the project
and are very difficult to anticipate. These shocks have often led to
project cancellation or renegotiation.
Disillusionment with Infrastructure
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A study of over 1000 infrastructure
privatizations in Latin America and the
Caribbean between 1982 and 2000 found that
75% of all W&S and 55% of Transportation
projects had to be renegotiated within a few
months (Guasch, 2002)
Investor interest has reduced due to failures
in the past, poor performance of previous
projects, pessimism, political and other risks
that they have to consider
Overall Verdict on Privatization
„
„
PPPs are not a universal panacea. However, if
used judiciously, PPPs can lead to the efficient
delivery of infrastructure.
In order to ensure the success of PPPs, issues
to consider are
… Economic
feasibility of the project
… Social and political acceptability
… Creating flexible and hierarchical contracts
… Addressing Pricing issues
… Introducing Competition
… Establishing a Regulatory and Institutional policy
framework
Thank You